Download Methods for Teaching Personal Financial Literacy 7/8/13 See notes

Methods for Teaching Personal Financial Literacy
7/8/13
See notes
Millionaire Game
Economic Way of Thinking
Scarcity = Wants > availability
Unlimited Wants > Limited Resources
Scarcity – Choice
Economics is the study of choice
* use pictures/cartoons in presentations
Scarcity requires choice means trade offs
* choices slides
Decision making framework (can use a matrix)
P
Define the Problem
A
List the alternatives – ways to achieve the outcome
C
State the Criteria – standards to judge
E
Evaluate the alternatives – apply criteria to alternatives
D
Make a Decision
Different slides indicate different problems : dinner, car
Financial Plan Step 1: Goal Setting
Goals: to be, to have, to do
Goals will point you in a direction
Have a time frame
Short term 0 – 3
Intermediate 3-5
Long > 5
Types
Financial
Non-financial
Every choice has a cost. When you choose one you give up another.
Opportunity lost = opportunity cost
Transactions cost = the friction to doing the deal
“Choosing is refusing” - choose A, refuse B
Cost of A is value of B
If you make a choice there is a cost. There is no such thing as a free lunch.
If it sounds too good to be true, then it probably is.
What’s “too good to be true?”
Recognizing “normal” rates of return can be helpful
Opportunity cost = explicit + implicit
Explicit
Implicit – what you gave up
How refinancing can save you almost 100,000 u.s. news and world report
Benefit of paying off loan early, B(x)?
Interest you do not have to pay bank
Cost of paying off loan early, C(x)?
Forgone “return” from next best alternative use of $
Loan term and time value
Time value of money****
Starting place
Net worth(wealth) statement (balance sheet for a company)
At a point in time called a “stock” variable.
Assets
Liabilities
Assets = liabilities + net worth
Income and expense statement
Example for month of June 2013 is a flow variable b/c it flows over
time.
Income
Expenditures
Income – expenditures = surplus or deficit
To reach your goals, estimate how much you must:
Earn
Save
Stock vs. Flow
Stock is a quantity measured at a point in time.
A flow is a quantity measured per unit of time
Random.org – random number generator
Why choose
B(x) > C(x)
Scale picture
Key concept: People respond to incentives
Toblerone activity
Law of Demand: If prices go up then quantity demanded goes down or if prices go
down, the quantity demanded goes up.
Demand means the whole curve. The quantity demanded is the number at a set
price.
Demand curve estimation
Three approaches to demand estimation
Generate data
1. experiment
2. Survey
Collect real world data
3. econometrics
Law of Supply
As price rises, quantity rises/ as price falls, quantity falls
Double Auction Experiment - ****** great activity
Day 2
7/9/13
Activity with gummy bears to show cumulative aspect of demand and supply.
John started with $2 for gummy bears and dropped by .25 each time.
Factors for Income and Wealth
Hudsucker Proxi clip Hula Hoop sales
Batting helmet example
Have students create and label the supply/demand graph
Markets
Labor
Stock
Bond
Commodities
Real Estate
Bead activity – great math activity too journal of economic education 1992/curt
Anderson lesson #1
Capuchin Monkeys and Inequality - you tube Emory University study
Deserted Island activity Math-econ for life grades 6 -8 Lesson 9
Ann and Pam
Standard M1.1 and M3.3
Define human capital and give examples of it
Explain how human capital is related to career choices, opportunities, and income
Define opportunity cost and give examples of it.
Lesson 2 – Invest in Yourself Quiz – dime activity
Bureau of labor statistics – check data
Labor Demand and Labor supply
Demand for labor depends on two variables:
1. Demand for the product that labor produces
Labor demand = derived demand
2. Productivity of Labor
Graph, graph, graph……use excel
Supply of Labor
Normally upward sloping S curve
Slow and Jobless Recovery
Arguments:
1. Sector mismatch: worker skills don’t match openings .
education to match
Policy: improve
Trend: - greater demand for skilled workers.
2. Aggregate demand insufficient
-policy: more fiscal or monetary stimulus
reduce uncertainty in economy – regain confidence
3. Job polarization:
- shift in U.S. employment distribution / u shaped employment distribution
- non-routine cognitive labor
- problem solving skills
- intuition and persuasion
- steady demand for low skilled (low wage)
- non routine manual labor
Non-routine : difficult to automate and out source
2. Productivity of workers
productive worker
- natural ability
- work ethic, self discipline
- getting along with others
- acquired skills (human capital – education/training)
- experience
Key: acquire and use skill
Standard of living
Material well being of a nation
Measured by GDP per capita
The joy of stats – great visual graph for gdp from bbc
Sources of economic growth and income
Perspiration
Longer work day
Higher labor force participation rate
Inspiration
Video – production in the third world
Education gives you more flexibility, more choices
Assumption that more goods and services increases the standard of living
Productivity is crucial and determined by
Technical knowledge
Physical capital
Human capital
Natural resources
****The country must have an environment that allows the use of these.
Risk Taking, Entrepreneurship and Innovation
Population graph – slide
What drives innovation?
What do we mean by “profit”?
Day 3
Muddy Points
Basic Definition of
The level of comfort and material goods enjoyed in everyday life by a community,
class, or individual.
Includes factors such as income, quality and availability of employment, class
disparity, poverty rate, quality and affordability of housing.
Often use (GDP) because most of the standard of living measures tend to rise or fall
with real GDP.
Human Development Index
What order would you teach?
1. Scarcity = choice=outcomes (poverty around the world)
How do society’s choose
Economic systems and broad social goods
2. Market economy – how do markets work (demand/supply)
3. Market Failure
price controls
Monopoly power – market structures
Externalities and public goods
Poverty – wealth activity and distribution of income
Economic growth – summary /how do we get economies to grow.
Create an environment that encourages the efficient development and use of these
scarce resources.
Institutions of the economy:
Property rights and the rule of law
Free and open markets
Economics of Taxes
Govt. performs many tasks:
Define and enforce property rights
Provide rule of law
Ensure competitive markets
Provide public goods
Provide social safety net
How do we pay?
Taxes 2011 taxes 2.5 trilliion 1/6 of GDP
Borrow by selling bonds (iou’s) (treasury bonds)
Show slides – great examples to show large numbers
Slides comparing different tax % of various countries
Other Federal tax slide - ****
Fiscal life expectancy
- longer life expectancy
- lower fertility
fewer workers paying taxes to support aging population
1940 8.6
2000 4.7
CBO data/ slide
Healthcare is the main issue: medicare/Medicaid
Yoram Bauman economist at University of Washington you tube
Regardless of what form the reform takes, Our students will need to take more
responsibility for their retirement.
Slides comparing going to college or not.
Taxes: review from yesterday.
Marginal tax is a derivative.
Overview of Tax System
Taxes paid (T) = tax rate(t) x tax Base (B) = tB
Great slide – leads into proportional thinking.
Tax Principles
Benefits principle:
- pay taxes based on benefits received / similar to private goods
Ability to Pay principle
- pay taxes based on how well can shoulder burden / equal sacrifice
- Vertical equity
How much more should the rich pay?
Proportional tax
Progressive tax
Regressive tax
Policy debate focused on “do the wealthy pay their fair share?”
No objective way to make the judgment
Economics of Savings
What is saving?
We do three things with our income:
Taxes – purchasing goods and services through the govt.
Spending
Saving
Saving = [income – taxes] – spending
Opportunity cost of saving – give up spending now
In CHOOSING we weigh benefit against cost
Saving Assessment – Harvard researcher
10% save too much
30% save about the right amount
60% save too little
Time inconsistency (hyperbolic discounting) } Behavioral Economics
Present and future self disagree
Status Quo Bias
We tend to adopt defaults
Thinking , Fast and Slow (harvard researchers book)
Economic way of thinking
1. why people choose what they do
2. Consequences of people’s choices
3. If inefficient, how improve outcome?
Policy change to “Nudge” – book out of chicago
Neuroscience
PFL
Most financial advisors recommend saving approx. 10% of gross income
Activity from Federal Reserve in St. Louis – “Try to Keep the Currency” check out
their website. www.stlouisfed.org/education
Credit – Obtaining use of money that you do not presently have.
Credit cards
Convenience users – pay off full balance each month
Borrowers – carry balance and pay finance charges
Types of consumer credit
Closed end credit
Open end credit
The Truth and Lending act (1969) requires creditors :
The finance charge as a dollar amount
Disclose the (APR)
APR provides true interest cost b/c it reflects the impact of fixed
charges
Bases the interest calculation on the amount of usable funds the
borrower has.
Card Act of 2009 took effect feb. 2010
Three C’s of credit
Capacity – do you have adequate income
Collateral - a form of lender insurance
Character – are you honest and reliable
https://www.annualcreditreport.com entitled to one free a year from each of the
three reporting agencies.
300 – 850 credit score
Investing
How to invest?
Background on a business
Types of options for business
Video – don’t buy stuff Saturday night live
Website: GeniRevolution.org/corresponds with LEI lessons
Bankrate.com great for calculators on loans
Federal Reserve site also has calculators
Key role of Stock Market
Investors more likely to purchase stocks
Limited loss – only purchase price
Bonds
World’s largest investment sector
Debt – promises to repay fixed amount of funds
Corporate bonds (30 year maturity)
Government bonds
U.S. savings bonds
U.S. treasury bills, notes and bonds (time varies for maturity)
Bond is an IOU from issuer
Secondary Market: Bonds are bought and sold repeatedly before maturity
Treasury Bills – one year or less maturity
Sold at discount
Government pays face value at maturity
Treasury notes and bonds
Face value
Coupon rate
Maturity date
Criteria for investing:
Risk
Return
Income
Understanding Rates of Return
P(1 + i)
Year 2 P(1 + i)(1 + i) = P(1 + i)2
Pn = P(1 + i)2
Day 4
Website: we are teachers
National Debt
Total amount of $ the fed government owes
Cumulative sum of its past deficits and surpluses
Debt is a stock variable – at a point in time
WWII : eliminated many personal exemptions. Deficit reached 23% of GDP
“unfunded liabilities” = promises we have made to social security etc
Put debt as a % of GDP rather then look at the debt as a number.
Debt held by public is 75% of govt. debt, and ½ of the public is foreigners.
FRED is the st Louis federal reserve bank
Resources:
Heritage Foundation
Wikipedia
OECD
Compound Interest – John’s slide with time line and colors for each year.
Examples of Stock Indexes – Domestic
Dow Jones Industrial Average
Large “blue chip” corp
1896 – 12 stocks
1928 – 30 stocks (can google the list)
Only 1 is still in and that is General Electric
S & P 500
- 500 very large and popular companies. Includes the 30 from DJIA
- *** Berkshire Hathaway stock holder meeting in early May
Capitalization
Market value of a company (P x Q)
- P = per share price
- Q = quantity of shares outstanding
- Large cap: PQ > $10B
- Mid cap: $2B < PQ < 10B
- Small cap $300M < PQ < $2B
Virtual Economics: use videos with flipped classroom concept.
Ibbotson – graph of stocks, bonds, bills and inflation
CAGR = compound annual growth rate
Calculate i
Geometric mean
Look at slides on this good illustrations
PERA
Last 10 years
Discover card flyer
Annamarie Lusardi mathematician Health and Retirement study
Time value of money
Example $240,000 per year for 16 years
Relationship between P0 and i
****check slide
Real vs. Nominal
Nominal – growth rate of money
Real – growth rate of actual purchasing power
- adjusted for inflation
Fisher Equation
Define :
I = nominal interest rate
 = inflation
r = real rate of return (inflation –adjusted rate)
Fisher equation
I = r +  or r = I - 
Avg r = 2 – 3%
Another weighted average index
Consumer price index (CPI)
Construct a basket of goods and services
Annual consumption of typical urban consumer
Quantities remain constant – fixed quantity
What you measure is what it would cost for a year and look at the difference.
Day 5
Muddy Points
FICO - the most widely used credit score model in the U.S.
FICA – Federal Insurance Contributions Act
Calc app – Ohio state University
Dollar gained when income is low adds more to your utility than a dollar gained
when income is high
Having an additional dollar matters more when facing hard times when things are
good
We are willing to pay the premium in high income states to receive a pay out in low
income situations
1. Insurance
2. Diversify
Insurance Activity
Insurance does not eliminate the risk, but spreads it around.
Most economists recommend insurance for large potential losses where you will be
severely impacted.
How to Invest My savings
Alternatives
Bonds
Stock
Savings
Risk
Return
Liquidity
Income
Risk (talking about two types)
Inflation risk
Market volatility risk
Strategies for dealing with risk
1. Market Timing – easy to miss the best months
2. Geometric Mean – common use
mutual funds and financial analysts refer to as
total return
compound annual growth rate (cagr)
(reasonable measure of mutual fun management)
a dollar weighted measure takes into account in and out $
Howard Marks:
“smart investing doesn’t consist of buying good things, but rather of buying things
well. Price is what matters most for investment success.”
Internal Rate of Return(IRR)
The rate of interest that satisfies the condition that the sum of the present
value of the outflows is equal to the sum of the present value of the inflows. Math
behind the market p. 60
Or
The interest rate that makes the net present value of an investment equal to zero
Prudent strategies to deal with risk
- if you think long term, the ups exceed the downs
- small stocks – most volatile, large stocks, govt bonds, tre. Bonds
- Standard deviation measures volatility
- The market bubbles around the GDP
- Don’t put all your eggs in one basket
o Diversify across asset class
o Diversify within asset class
60/40 diversification
Passive management approach
Index fund
Active management
Assumes can “beat the market”
Higher cost due to portfolio selection
Mutual fund pools investors money
Morningstar