Financial Literacy 101

Todd Jorns

www.flip4u.org
What would you do if you found $100?
 My 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.
 Quiz
• 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
 Questions
• 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?
 Today’s Agenda
• How to Have a Net Worth of $1 Million at
Age 55

• Interest Rates and Their Effect on Your

Investments

• The Magic of Compound Interest

• Rule of 72 – Lump Sum Investment

• Debt: the Good, Bad & Ugly

 How to Have a Net Worth of $1
Million at Age 55
Monthly Return of Return of Return of Return of
Savings Age 10% 8% 4% 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
Your Investments
$10,000 Lump Sum

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
 Interest Rates and Their Effect on
Your 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 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 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 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!
• 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 & Ugly
• House Loan (Mortgage)

• Auto Loan (Car or Truck)

• Personal Loan

• Credit Card
 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 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.
 Personal Loan
• Personal loans are considered bad debt
because you pay interest with no return.
• Only borrow if it is a true emergency.
• Shop around for lowest interest rate.
• Pay back the loan ASAP.
• Better to create your own “emergency”
fund and borrow from and repay yourself.
 Credit 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 Debt
• How long to pay off credit card?
– $5,000 balance
– 10% interest rate
– $100 monthly payment
 Credit 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 Debt
• How long to pay off credit card?
– $5,000 balance
– 20% interest rate
– $100 monthly payment
 Credit 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/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 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 Resources
• www.bogleheads.org/
• www.savingforcollege.com/
• www.yourmoneypage.com/
• www.mrmoneymustache.com/
• www.early-retirement.org/
• www.flip4u.org
 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?
Questions
tjorns@gmail.com

www.flip4u.org