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Meet Whitney and Justin Whitney– senior • Works part-time • Spends most of her money on clothes and going out with friends • Doesn’t stick to her savings plan Justin– 8th grader • Earns money from occasional odd jobs in neighborhood • Father was recently laid off from job • Is saving money for college 1 ©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work Save vs. Invest Alike Plan to use money later Keep ownership Save 2 ? Invest Store money somewhere to avoid spending now Use money with expectation that it will make a profit (Ex: stock, rental property, business) Original amount always available (unless stolen, lost, or destroyed) Not all investments are insured Insured if kept in a bank account No guarantee that original amount will be available if value of investment drops (except bank accounts) ©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work Millionaire Myth #1 – True or False? Millionaires usually work in sports, entertainment or lead gigantic Fortune 500 companies. Athletes and entertainers are notorious for squandering their money until they’re broke. Actually, half of all millionaires are selfemployed or own a business. Source: Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D. The Millionaire Next Door: The Surprising Secrets of America's Wealthy, 1996 3 ©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work Millionaire Myth #2 – True or False? Millionaires made their fortunes the easy way— inheriting it. Only 20 percent of millionaires inherited part of their money. And half of those inherited less than 10 percent of their assets.1 In fact, 76 percent of millionaires said “smart investing” is one of the top three factors contributing to their financial success. The other two critical elements are hard work and education.2 1Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D. The Millionaire Next Door: The Surprising Secrets of America's Wealthy, 1996 2Spectrem Group, 2012 Affluent Market Insight www.millionairecorner.com/article/smart-investing 4 ©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work Millionaire Myth #3 – True or False? Millionaires spend a lot of time managing their finances and trading stocks. Most spend less than six minutes per day on finances.1 They’re too busy making more money to invest! And they invest for the long-term. About 75 percent buy and hold stocks more than five years. Nearly 40 percent hold them 10 years or more.2 1Ric Edelman, Ordinary People, Extraordinary Wealth: The 8 Secrets of How 5,000 Ordinary Americans Became Successful Investors--and How You Can Too, 2000 2Chuck Carlson, 8 Steps to 7 Figures: The Investment Strategies of Everyday Millionaires and How You Can Become Wealthy Too, 2001 5 ©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work Millionaire Myth #4 – True or False? Millionaires spend tons of money on cars, boats, and other luxury items. Wealth is not what you make—it’s what you keep. True millionaires focus on acquiring assets that will make them money, such as real estate, investments, and their businesses. That’s why so many drive Fords and Toyotas. Source: Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D. The Millionaire Next Door: The Surprising Secrets of America's Wealthy, 1996 6 ©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work Millionaire Myth #5 – True or False? Millionaires never have to worry about having enough money. Nearly 42 percent of millionaires still don’t feel wealthy. They say they’d need investing assets of $7.5 million to feel truly wealthy and stop worrying. The more you have, the more you seem to need to feel financially secure. Source: Fidelity, Millionaire Outlook, March 2011 www.fidelity.com/inside-fidelity/individual-investing/millionaire-outlook-2011 7 ©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work 3 Ways to Build Wealth 1. Make enough money to cover essential expenses and have something left to save and invest. 2. Have a plan to save and use part of your income to invest. 3. Invest to put money to work for you. 8 ©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work Sources of Income for Teens Allowance Windfalls Job Sources of Income Earned Interest Sell Something Gift Money 9 ©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work Windfalls What are your windfalls? Unexpected chunks of money, like work bonuses, inheritances, tax refunds, or other. Use unexpected increases in cash to save and invest. 10 ©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work Inflation Same Item, Different Price $30 $27 $25 $20 $20 $15 $10 $5 $- 2000 11 ©2012 National Endowment for Financial Education | Lesson 4-2: How Investing Works 2012 Pay Raise for Whitney Whitney currently earns $7.25 an hour working part time. During her performance review meeting her supervisor informed her that she has earned a $.50 increase in hourly pay. •Is Whitney’s wage increase enough to keep up with inflation? •What is the minimum increase per hour she needs to at least match the average annual rate of inflation at three percent? 12 ©2012 National Endowment for Financial Education | Lesson 4-2: How Investing Works Pay Raise for Derrick Justin’s older brother, Derrick, now earns an annual salary of $28,080. He wants to ask about a raise at his next performance review. •What is the minimum amount of salary increase Derrick should request to keep up with the average annual rate of inflation? 13 ©2012 National Endowment for Financial Education | Lesson 4-2: How Investing Works Invest Now or Later? Which is better? A. Start investing a little now. B. Wait a while to invest more later. 14 ©2012 National Endowment for Financial Education | Lesson 4-2: How Investing Works Reasons to Invest An income investment provides expected earnings, usually in predictable amounts. • Earned interest – payment received in return for use of your money • Dividends – share of profits some companies pay to their stockholders • Rent payments – received from people or companies in return for using your property 15 Growth investments are purchased because of the potential that the value will increase over time; an unpredictable amount of money is received when the investment is sold. • • • • Real estate Business Crops Precious metals ©2012 National Endowment for Financial Education | Lesson 4-2: How Investing Works Stock Talk Businesses sell shares of stock to raise money to run the business. Someone who buys stock owns a portion of a business, depending upon how many shares are bought. A shareholder doesn’t take on responsibilities of running the company, but a company employee might happen to be a shareholder. A shareholder is allowed one vote per share when electing board members at shareholder meetings. Company management might decide to share part of the profits by paying dividends to shareholders (cash or shares of stock). The price of stock shares varies based on what people are willing to pay. Each stock has a unique ticker symbol (abbreviated name for lists). 16 ©2012 National Endowment for Financial Education | Lesson 4-2: How Investing Works How to Buy Stock 17 Select Broker Place bid (or ask) order with broker to buy (or sell) quantity at a certain price. Place order for broker to complete trade through an exchange Keep record of buy (or sell) for tax reporting Deposit Cash to open a brokerage account Decide what you want to buy (or sell) Pay transaction fee to broker at time of buy (or sell) Pay attention to stock news and price ©2012 National Endowment for Financial Education | Lesson 4-2: How Investing Works The Language of Investing Asset something of value that can be turned into cash Examples: stock, home, lake-front property, business Liability something owed to another person Examples: loan, rent Rate of Return degree to which an asset gains (or loses) value over a given period of time Examples: APY interest on savings, stock value increase/decrease Risk uncertainty of achieving a desired result 18 ©2012 National Endowment for Financial Education | Lesson 4-3: Choosing Investments Nike Shoes or Nike Stock? Air Jordan XVIII Shoes Nike Stock Price Hypothetical Nike Stock Portfolio (15 shares) January 2003 $175 new $11.53/share $172.95 January 2013 $60-$250 Market Price estimates $51.84/share $777.60+ (does not include quarterly dividends) Year + If the dividends paid each quarter had been reinvested, the total number of shares owned would be greater that 15 shares after 10 years. 19 ©2012 National Endowment for Financial Education | Lesson 4-3: Choosing Investments Risk Meter Start-Up Stock Certificate of Deposit 20 ©2012 National Endowment for Financial Education | Lesson 4-3: Choosing Investments Take the Risk Your risk tolerance depends on … – When you need the money (short-term or long-term) – Your financial goals – Your ability to live with any investing decisions with unpleasant consequences Tame the risk – Be sure you can cover your necessary financial needs – Know what you are getting into before you invest – Invest in different types of investments 21 ©2012 National Endowment for Financial Education | Lesson 4-3: Choosing Investments Diversify to Tame Risk Don’t put all your eggs in one basket. • Invest in a combination of asset categories: – More than one asset (Example: not all Facebook stock) – Variety of assets (Example: not just Certificates of Deposit) • Mix investments within an asset category: – Different industries (Example: not all retail) – Different-sized companies (Example: not all small) Divide investments among several “baskets”. 22 ©2012 National Endowment for Financial Education | Lesson 4-3: Choosing Investments Wealthy Habits 1. Be the one who invests your money. 2. Avoid unnecessary fees. 3. Believe in yourself. 4. Make tamed risks. 5. Be smart. 23 ©2012 National Endowment for Financial Education | Lesson 4-4: Investment Strategy