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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